Although not a guarantee, with the current market trend, it would be unusual if we didn't see a correction in the short term.

We recently talked about how stocks can behave in Wave 5, where they’re essentially wavering a bit. In this video, we’ll show you the best strategy for profiting in this kind of environment.

Video Transcript

Right now, what we’re seeing is a pretty much a textbook Wave 5 that is pretty long. Uniformly, you see a lot of positive investor sentiment, a lot of positive press, a lot of perma-bears turn into bulls and so forth. So, it gets a little fragile.

How do we deal with that as traders? There are a couple things we do and one, of course, is we’re always interested in some attractive bearish opportunities when they appear. Usually what we’re looking for stocks that are either fundamentally under-performing or are in groups that are under-performing or have special exposures to potential market volatility and market risks that are unique and could lead to very sharp corrections to the downside. Our trade in Ford Motor Company(NYSE:F) would be an example of that.

However, as long as you’re in Wave 5, there’s no reason to necessarily outright best against it. You still want to look for some interesting bullish opportunities because we don’t know how long it’s likely to continue. [You can find a bullish opportunity we identified here.] You can get to the point where the divergences and things like we’re looking at right now are getting to extreme levels, even much more so than this.

It’s really rare for it to extend, again, to make another move to the upside without some kind of a more significant correction, maybe something around 1,485 on the S&P 500. That’s, more or less, where I’m projecting right now that when we do correct, we’ll probably see something in that range.

But it has happened before. The last time we really had a situation that was like this and the market didn’t give us a really sharp correction was in 1979. So, we have to go way back in time to really find an occasion where that fifth wave never really gave up and we got a sixth wave.

In fact, if we go back in time, March 2012 was very much the situation with the higher-risk sectors under-performing the safety sectors, the defensive sectors. The market continued to hit new highs, even though defensive sectors were leading the market. It faked a lot of traders out. It was really hard to deal with that.

Eventually, the market did correct. We got a decline, a proper correction, which I show you on the chart in the video, just like we expected. I think that is likely to happen in the short term. The question is whether or not the first two weeks of earnings season are going to kick it off.

There are a couple of catalysts that could push this, and we’ll look at the biggest one in more detail in the next video.

Investor Place advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.

At 24/7 Trader, you have full access to some of the market’s most experienced and successful options trading experts, and you can connect with other options traders who are down in the trenches just like you.

Our options experts have seen it all, and they’ve backed up the truck in all kinds of markets. What better way to learn (and profit) than from someone else’s experience? Read More